Going Private

Sept. 2, 2011

A publicly held company generally means a company that has a class of securities that is registered with the Commission because those securities are widely held or traded on a national securities exchange. When a public company is eligible to deregister a class of its equity securities, either because those securities are no longer widely held or because they are delisted from an exchange, this is known as “going private.”

A publicly held company may deregister its equity securities when they are held by less than 300 shareholders of record or less than 500 shareholders of record, where the company does not have significant assets. Depending on the facts and circumstances, the company may no longer be required to file periodic reports with the SEC once the number of shareholders of record drops below the above thresholds.

A number of kinds of transactions can result in a company going private, including:

Another company or individual makes a tender offer to buy all or most of the company’s publicly held shares;

The company merges with or sells all or substantially all of the company’s assets to another company; or

The company declares a reverse stock split that reduces the number of shareholders of record. In a reverse stock split, the company typically gives shareholders a single new share in exchange for a block—10, 100, or even 1,000 shares—of the old shares. If a shareholder does not have a sufficient number of old shares to exchange for new shares, the company will usually pay the shareholder cash instead of issuing a new share, thus eliminating some smaller shareholders of record and reducing the total number of shareholders.

If an affiliate of the company or the company itself is engaged in one of these kinds of transactions or series of transactions that will cause a class of equity securities to become eligible for deregistration or delisting, Rule 13e-3 of the Securities Exchange Act of 1934 and Schedule 13E-3 may apply. When Rule 13e-3 applies, the company is said to be “going private” under SEC rules. While SEC rules don't prevent companies from going private, they do require companies to provide specific information to shareholders about the transaction that caused the company to go private. In addition to a Schedule 13E-3, the company and/or the affiliates engaged in the transaction also may have to file a proxy or a tender offer statement with the SEC.

When one of the kinds of transactions listed above involving a company or its affiliates results in a company’s publicly held securities becoming delisted from a national securities exchange or an inter-dealer quotation system of any national securities association, Rule 13e-3 and Schedule 13E-3 may also apply.

Schedule 13E-3 requires a discussion of the purposes of the transaction, any alternatives that the company considered, and whether the transaction is fair to unaffiliated shareholders. The Schedule also must disclose whether and why any of its directors disagreed with the transaction or abstained from voting on the transaction and whether a majority of directors who are not company employees approved the transaction.

Going private transactions require shareholders to make difficult decisions. To protect shareholders, some states have adopted corporate takeover statutes that provide shareholders with dissenter's rights. These statutes provide shareholders the opportunity to sell their shares on the terms offered, to challenge the transaction in court, or to hold on to the shares. Once the transaction is concluded, remaining shareholders may find it very difficult to sell their retained shares because of a limited trading market.